As the world financial system started to fall apart we came together and linked arms and together we shall overcome. Let our enemies, who sew doubt and fear and mistrust in our global financial system at the cost of immense human suffering show their faces. Because here we are the leaders of our world, acting in the interests of our world and ready to stamp them down.
When the money that we give to international financial institutions starts to flow and the money that we have invested in restarting our economies starts to flow life will inevitably come back into the world economy. The institutions we have commended with the task of protecting our suffering economies will have the funds to ease the flow of international credit and trade.
You have the right to hope for and expect prosperity and you have the right to expect your government to identify the enemy of our prosperity and destroy it. And we know that enemy and I tell you now we will destroy it with our combined might and faith.
Our enemies are like carrion eaters, who benefit from disaster and misfortune. They speculate that we do not understand that by talking the economy down, by talking your leaders down, by speculating on our misery, that they will some how profit. They will not.
They underestimate our determination to solve the problems that threaten your children, that threatens the poor more than the rich the weak more than the strong. They underestimate our combined strength of united governments. And they underestimate your determination and strength and support for a solution. We will not allow them to imperil our future.
Soon, we trust, the efforts of the responsible adults of this age will allow us to be able to turn around and say, looking the poorest suffering child in sub-Saharan Africa in the eye: "You will never die of hunger. Now that is a noble aim. That is something worth uniting and fighting for. We will not disappoint that child. Goodness will prevail and we shall overcome.
Follow our lead. Come with us on this journey to prosperity. Trust is our weapon. Trust, trust, trust! Trust us to do what we must do. Trust your companies to succeed. Trust your people to repay their debts. Trust people to buy your products and let's get to work and let's keep people productively in work and positive.
Yes humans are good at survival and looking after their own selfish interests and disregarding "the good". Yes, this crisis bears witness to that. I don't deny it.
But when I was young my mother gave me a poster and hung it on my wall and I still have that poster today. It hangs in the oval office. On it is a quote by my fellow American, Mark Twain - (and there are two fellow Americans who share this platform with me today.)
Twain said: "The maddest thing of all is to see life as it is and not as it should be."
Human beings are also capable of achieving the miraculous. Just look around. This generation is determined to be remembered by history with admiration and fondness. Men and women of all nations and cultures and beliefs have come together to solve a problem that threatens humanity. And we will do so with good humour and optimism.
I am sure that in the future they will look back in admiration at the actions of those of us here who - representing our peoples and in representation of humanity - set themselves against doubt and sabotage. And our children and their children will view the actions of those who wittingly or unwittingly were against us, with disgust and dismay.
We will achieve a prosperous and fair world.
This conference marks the beginning of a world united against our common enemy: impoverishment. This is just the beginning of the great rich story of our lives. We have come together and we shall overcome!
Thank you.
Best read this, by Nobel winning economist Joe Stiglitz (his opinion is seconded by Nobel winning economist Paul Krugman) before you start patting yourself on the back, Mr. Obama:
ReplyDeleteTHE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.
Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.
Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.
The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.
In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.
The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.
Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!
Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.
If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.
Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.
But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).
But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.
The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.
Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.
Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.
But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.
The system that is the problem isn't going to solve the problem. Obama is eiher delusional or another creature of Wall St.
I know, I know, Misha. This was an exercise in rhetoric. Whose going to be happy about the dreaded IMF getting a trillion dollars? Not me. But it does make you wistful, doesn't it? That they would get their act together.
ReplyDeleteAbsolutely, Isa. The IMF have left a trail of devastation in their wake. Tanzania is a good case in point but I'm sure I don't have to tell you.
ReplyDeleteOf course, you're right and it would have been nice if they'd got their collective act together. The trouble is, the politicians and politics we have, devoted to the short-term, focused on being re-elected and lining their pockets *are* the problem.
We *need* a revolution, Isa. In the head and in the world. I'm not sanguine.
Well let's do it Misha.
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